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Austerity or Growth: A False Dilemma

Thursday, June 7, 2012

Most austerity advocates want to exempt defense from spending cuts; most Keynesians want demand-stimulating investments. A defense-focused 'investment' budget might be an effective compromise for Capitol Hill.

A false dilemma has crept into the public discourse concerning the preferred path of escape from economic doldrums: Voters supposedly have an either/or choice between austerity and growth. For example, the voters of France recently elected Francois Hollande, thereby having chosen growth over austerity, according to the headlines, which in turn creates heightened economic tension in Europe because of Germany’s alleged preference for the austerity path.

But there’s one big problem: “Growth” versus “austerity” is a false dilemma between two oversimplified choices. Not only can the wrong kind of growth be bad for future generations, but the wrong kind of austerity can also be dangerous, even deadly.

It’s true that both paths share the same virtuous goal—deficit reduction—which is almost unanimously deemed necessary to improve any nation’s fiscal balance and creditworthiness. But that’s where the similarity ends, because “austerity” means cutting government spending to reduce the deficit, while “growth” means increasing government’s tax revenues to achieve that goal. It’s a false dilemma because growth and austerity are not mutually exclusive choices, and it’s oversimplified because there are good and bad ways to grow, as well as good and bad ways to achieve austerity.

Good and bad growth; good and bad cuts

Not only can the wrong kind of growth be bad for future generations, but the wrong kind of austerity can also be dangerous, even deadly.

The “growth” path can be good or bad, and the growth debate is lively. Growth in tax revenue through private-sector expansion is good; growth through ill-advised government expansion is bad. Growth of the workforce and of real incomes is good; growth in the scope of government or in tax rates is bad. Is more government stimulus needed to jump-start the private sector? Yes, say the liberals; no, say the conservatives. Are higher tax rates bad for the sluggish economy? Yes, say the conservatives; yes—with one exception—say the liberals. Will steady and predictable hands-off policies restore the higher-growth equilibrium? Yes, say the conservatives; don’t count on it, say the liberals. Is preventing a debt-deflation spiral a top priority? Yes, say the liberals; what the heck is that? say the conservatives. Could the economy now be stuck in an ugly, alternative equilibrium of low growth and high unemployment? Yes, say the liberals; no comment, say the conservatives. Would extra “temporary” fiscal stimulus programs turn out to be permanent, ratcheting up the government’s involvement in the economy? Yes, say the conservatives; no comment, say the liberals. In short, the growth debate is a lively one.

Likewise, the “austerity” path can be good or bad, and it too is a contentious debate. Cuts in wasteful and improper spending are good; cuts in meat-and-bone spending are bad. Cutting improper or nonproductive programs is good; cutting into government’s ability to perform its necessary and proper duties, such as providing for the common defense, is bad. Do the liberals have a better definition of good spending and bad spending than the conservatives? Is “investment” always just a code word for “spending”—or is it actually possible for some spending to improve the nation’s future?

Defense spending and the austerity debate

The U.S. defense budget provides a good example of the potential danger inherent in oversimplifying the austerity debate. A snapshot of our defense spending history is a good place to start. The chart below shows our debt and our defense spending relative to the size of our economy—along with the timing of the major wars we’ve fought, and the so-called peace dividends we’ve experienced.

6.6.12 SConover Defense Spending

When we contemplate our defense spending history, one unsurprising fact jumps out: Every war causes defense spending to spike, which in turn nearly always contributes to an increase in the federal debt relative to the size of the economy; conversely, nearly every postwar decline in defense spending (the “peace dividend”) contributes to a decrease in the debt relative to GDP.

The unarguable, unsurprising conclusion is that fighting wars is far more costly than preventing wars.

The unarguable, unsurprising conclusion is that fighting wars is far more costly than preventing wars. But another, not-so-obvious implication from the chart is that a growing economy is a painless way to reduce both defense spending and the federal debt relative to the size of the economy. Such effects can be seen in the growth decades of the 1920s, 1950s, 1960s, and 1990s.

The timing of our so-called postwar peace dividends, compared with the timing of costly major wars, begs some important questions. Which of the costly wars in our history could have been avoided had we reinvested the peace dividend in measures that might have prevented a future war or two, instead of “investing” them in nondefense programs or in politically popular budget surpluses? Might a squandered peace dividend be more accurately labeled a “defense disinvestment”?

The Roman called Vegetius has been credited with the following:

If you want peace, prepare for war.

Reagan rephrased it as “peace through strength”—and for him, it wasn’t just rhetoric, it was policy. The 1980s defense buildup, to this day derided by many as “massive” increases in defense spending, arguably prevented a war between superpowers, clearing the path for subsequent economic expansion. Imagine the difference Reagan made by preventing such a war.

Rush Limbaugh had it all wrong when he glibly said that the purpose of the military is to “kill people and break things.” Reagan would not only beg to differ, he demonstrated that the purpose of a strong military is precisely the opposite: To prevent a war that would kill people and break things. Not only did the 1980s defense buildup not kill anybody or break anything, it doesn’t look massive at all compared with the cost of wars we were not able to prevent. Instead, it looks more like one of the best investments we’ve made in our entire history.

Short-run austerity, at the expense of future generations’ safety and prosperity, is false austerity.

The Reagan defense buildup is evidence for liberals that defense spending can be productive instead of wasteful, and evidence for conservatives that at least some government spending is indeed an excellent “investment” in our future well-being. Cutting waste from the defense budget is an excellent goal, and reinvesting the resultant savings productively in future-war prevention is also an excellent idea, but refusing to reinvest it is bad management.

If “austerity” means steady, predictable defense spending (on the order of, say, 5 or 6 percent of GDP) to save the much larger cost of future wars by preventing them, then austerity is an excellent goal. However, if “austerity” is dumbed down to mean cutting fat, meat, and bone from today’s defense budget in the name of giving the accountants a way to report a smaller budget deficit, then it’s a good bet that Reagan is frowning down on us. Short-run austerity, at the expense of future generations’ safety and prosperity, is false austerity.

In other words, we can rephrase Vegetius in several ways:

• If you want peace, don’t squander a peace dividend.

• If you want peace, reinvest peace dividends in war prevention.

• If you sacrifice defense to smaller deficits, prepare for the consequences of future war.

• The cost of war prevention is far less than the cost of war.

AEI’s Kevin Hassett recently noted that Keynesians tend to favor government spending increases to boost aggregate demand, which contrasts with the austerity advocates’ view that government spending cuts could be offset by increased private sector activity. Fortunately, those two competing views may offer a subtle opening for a grand compromise: Most austerity advocates want to exempt defense from spending cuts, and most Keynesians want demand-stimulating investments. Because war prevention is unarguably one of our best possible investments, a defense-focused “investment” budget might be an effective compromise for Capitol Hill. Liberals would need to shelve their view of the defense budget as a piggy bank for social spending, and conservatives would have to do likewise with their view that there’s no such thing as “investment” or beneficial “spending increases” by government.

It’s not a simple choice of growth or austerity—it’s more complex than that. Not only must we distinguish between good growth and bad growth, we must also distinguish between smart austerity and dumb austerity—especially when it comes to the defense budget. It should be difficult for either side to argue against a steady-as-we-go investment in war prevention.

Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy.

FURTHER READING: Conover also writes “A Tax Increase without the Pain,” “The Debt Ceiling Distortion,” and “The Unfairness of the Buffett Tax.” Mackenzie Eaglen says “Sequestration Will Cause Irreparable Harm to National Defense.” Kevin A. Hassett contributes “Cut to Grow.” Nick Schulz discusses “Self-Inflicted Blindness: The Austerity Threat to Innovation.”

Image by Darren Wamboldt / Bergman Group

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